MIT: Independent Activities Period: IAP

IAP 2013

Monetary Policy at Zero Interest Rates: Understanding Recent Federal Reserve Actions

Ivan Werning, Professor

Jan/28 Mon 10:30AM-12:00PM E51-395

Enrollment: Unlimited: No advance sign-up

The US economy is a Liquidity Trap. The 2007-8 crisis in the U.S. led to a steep recession, followed by aggressive policy responses. Monetary policy went full tilt, cutting interest rates rapidly to zero, where they have remained since the end of 2008. Unconventional monetary policies were also pursued, starting with “quantitative easing”, purchases of long-term bonds and other assets. In August 2011, the Federal Reserve’s FOMC statement signaled the intent to keep interest rates at zero until at least mid 2013. These statements have been subsequently renewed and extended.


This talk uses recent research to shed light on the inherent policy challenges of such liquidity trap scenarios. Using a simple macroeconomic model of the economy we will characterize optimal monetary policy responses employing optimal control techniques. The model highlights the importance of communication and commitment, with optimal policies requiring "forward guidance" to maintaing future interest rates at zero.


The results provide insight into current debates and policy decisions regarding monetary policy by the Federal Reserve.

Sponsor(s): Economics
Contact: Kim Scantlebury, E52-252, 617 252-1565, KSCANTS@MIT.EDU